Earlier this month, the Federal Circuit held an en banc session to hear oral argument in EcoFactor, Inc. v. Google LLC. In this case, the court is reviewing whether a district court erred in “failing to rigorously scrutinize a patentee’s reliance on supposedly comparable licenses,” resulting in an “artificially inflated damages award that is divorced from market realities and devoid of connection to the patent’s incremental improvement to the art.” This is our argument recap.
Ginger Anders argued for Google. She began by highlighting that Federal Rule of Evidence 702 “has long required courts to ensure reliability before admitting expert testimony.” Here, she maintained, the expert’s testimony “was clearly unreliable” because the expert relied on “unsupported and self-interested” statements by Ecofactor’s CEO. Anders argued the expert relied on license agreements to apply a royalty rate to Google’s sales. “But,” she continued, “the licenses simply did not support that proposition because the licenses had lump sums.” And, she explained, “the licenses had operative clauses that said the lump sum is not based on sales.”
A judge asked whether the expert’s reliance on a witness’s testimony was “sufficient” in the circumstances. Anders argued it was insufficient for two reasons. First, she said, relying on the underlying testimony “does not support the conclusion that the licensees agreed to apply this rate.” Second, she continued, the witness’s testimony “is not the sort of evidence that an expert would reasonably rely [on] because it is an unsupported assertion by an interested party as to the key fact in the damages case.”
A judge, however, suggested a threshold issue is whether the expert’s testimony was “less than rigorous” and suggested that Google is calling for a rule that is “more rigorous.” Anders responded that Google is not asking for a new rule. Instead, she said, Google simply seeks a ruling that the district court abused its discretion. Anders argued that the Supreme Court requires “sufficient facts and data . . . of the sort that an expert would reasonably rely on.” She said “that did not happen here because the district judge did not do the reliability analysis at all and kicked it to the jury,” which she said “is legal error.” A judge and Anders noted that the district court did not “say anything about” the challenge to the expert’s testimony.
Brian David Ledahl appeared for EcoFactor. He argued the expert in question “looked at the profit attributable to the accused products . . . and apportioned that profit . . . that was attributable to the patented features.” Further, he argued, the expert “looked at that number not as the end point of the analysis but as ‘how did the parties split the profit?'” According to Ledahl, the expert’s “analysis was that, based on . . . the hypothetical negotiation, the parties would have arrived at” the rate in question.
A judge questioned whether Ledahl “address[ed] the direct issue that we spent all of our time on.” According to this judge, “the issue is, ‘was there a problem with Mr. Kennedy attributing that particular rate to'” the licensees? In response, Ledahl indicated he did not “really think” that question is governed by Rule 702.
Another judge asked where EcoFactor “c[a]me up with the number?” Ledahl responded that it “comes from the [lay witness’s] understanding of competitors and what their sales volume generally are.” But, a judge highlighted, “later on, he says, ‘I didn’t know what the numbers were.'” The judge continued by noting the witness said “later that he had no idea what [the competitors’] projected sales were [or] their actual sales, and no information was provided to him . . . from EcoFactor.”
A judge later noted that she did not “see any testimony” by the expert “that specifies [this] license in particular is indicative of what the whole industry would pay.” In response, Ledahl suggested there is no dispute that experts “need not rely on undisputed evidence only.” He said “that’s painfully clear in the advisory committee notes to . . . Rule 702.” Ledahl argued the correct question should be whether the testimony “is sufficiently tied to evidence that’s going to be coming in the record such that a reasonable fact finder could decide, yes, that fact is true.”
In her rebuttal, Anders argued that, “in the abstract, it’s possible that one [license] could be enough.” But, she said, “it is not enough here.” She suggested the court might “order a new trial,” where . . . the “damages theory would have . . . to be very different.”
She suggested “the way we think about expert testimony and reliability is informed by the legal principles that govern the patent damages analysis.” And, in this regard, she continued, the Federal Circuit “has repeatedly said that lump sum licenses are not probative of a royalty rate.”
A judge asked whether an “objection was made at trial.” In response, Anders indicated that, under Federal Rule of Evidence 103(b), “we didn’t have to make one because we had preserved it in the motion in limine.”
In summing up her argument, Anders suggested that, “if this kind of expert testimony is upheld, patentees could enter into small lump sum licenses” and “insert unilateral assertions about what the rate they think should be.” In reality, she said, “licensees would have little incentive to protest in many cases.” The result, she continued, would be that patentees “could use expert testimony to transform those unilateral assertions into authoritative expert testimony that the licensee actually agreed” to a particular rate. She argued this result would “undermine the jury’s ability to reach fair apportionment verdicts, and it will ultimately harm innovation.” For that reason, she indicated, “the court should police the outer bounds of Rule 702 here and order a new trial.”
We will continue monitoring this case and report on developments.